H-E-B’s 15% Investment in Loyalty: How A Family-Run Chain May Upstage Walmart, Others

Supermarket chain H-E-B’s plan to give its workers a stake in the company hints at technological capabilities that enable retailers to better compensate their workers. The task is balancing the benefit of better compensation against using the savings to improve the bottom line.

Craig Boyan would like to offer a 15 percent tip to other retailers: If you want to offer a better experience, then do what you can to keep your best workers working better.

Boyan, CEO Of the Texas-based supermarket chain H-E-B, is giving roughly 15 percent of the retailer’s shares to about 55,000 employees. Workers who are older than 21, have been with the retailer for at least a year and put in at least 1,000 hours annually will qualify for the perk.

The 370-store, family-owned chain offered this perk in part to foster loyalty among its workers, as well as improve long-term financial stability through reduced turnover. It also further upends the low-wage retail worker debate, which has recently pressured Walmart and others to raise hourly pay.

To Boyan, the ability to increase compensation is apparently upon us, if not a foregone conclusion. As the CEO told the New York Times: “Technological advances in sourcing and distribution should allow retailers to pay their workers more.” The task, for many retailers, is balancing the benefit of better compensation against using technological savings to improve the bottom line.

Cost of Replacement: 40% of Salary

In an industry where every busted cereal box and broken egg eats into the margin, percentage points count for a lot. So let’s look at the value of loyal and happy workers in that context.

Employees earned raises averaging 3 percent in 2014, according to a well-trafficked story in Forbes. Yet the average pay increase an employee received if leaving for another employer in that year ran from 10 to 20 percent. Makes jumping ship sound rewarding.

In the supermarket segment, where pay has traditionally been tight, employers may feel they were competing in an apple-to-apples arena, but companies such as H-E-B are changing that, and it could pay off well.

The cost of replacing an entry-level worker runs between 30 and 50 percent of that worker’s annual wages, according to the consulting firm Zen Workplace, which specializes in organizational “people problems.” Replacing a midlevel employee can cost more than 150 percent of his or her annual wage.

So if a retailer pays its workers $10 an hour (which is what Walmart raised its hourly pay to this year), the cost of replacing one full-time worker (recruiting, interviewing, training, etc.) would run from an estimated $6,200 to $10,400, according to these calculations.

For skeptics who feel those figures are too high, we can estimate the cost at a modest 10 percent of a worker’s annual wages – $2,000. Multiply that by 10 workers over a year, and the employer ends up spending a sum equal to the annual wages of one full-time worker.

Raise All Ship(ments)

H-E-B is opting to maintain and grow its worker investment by directing more of its own profits into their pockets, a move that ideally will inspire workers to perform better. If the company’s bottom line increases, so will that 15 percent stake. It’s textbook “a rising tide lifts all boats” philosophy.

CEO Boyan also raises a compelling issue in explaining his decision to share the shares: Advancements in sourcing and distribution should result in reduced overhead expenses, which can be redirected to compensation.

Such decisions are not made lightly, however. The same technology that improves distribution also complicates purchase channels and competition. Supermarkets compete with Amazon, Jet, Shell, CVS and even T.J. Maxx. To stand apart, a supermarket may earmark money saved in distribution for enhanced digital communications, delivery options and general promotions.

None of these efforts, however, will be worth the bags the groceries are carried in if the shopper is unhappy while unpacking. The customer experience is the most valuable asset for which a retailer can strive, and its employees are essential to earning it. As Boyan put it to the Times:

“So many in retail are competing in the race to the bottom, and people are the largest cost. So it seems logical to cut people, and lots of folks are doing it,” he said. “We think that’s a trap. We believe the race for the bottom cheapens the American experience. It’s bad for the country and bad for companies.”

Worker Passion, Principles

Boyan expresses a sentiment that is gaining muscle across the country: An engaged, invested employee delivers something that neither income statements nor strategies can quantify, and that is emotional connections. Employee passion picks up where money fails us.

Put in more direct terms: A retailer cannot change customer behavior, reliably and long-term, if it does not positively affect employee behavior. Following are some guiding principles that have worked well for my company and others:

Identify best workers: Many formulas exist to identify high-potential workers, but the results can shift depending on engagement levels, so I look for budding leaders who can bring out the best in their staff. These workers are reliable, unafraid to raise their hands, consistently seek new challenges and opportunities for development, and generally are well liked.

Empower them: Workers who are not free to make independent decisions are often paralyzed by fear of making a mistake. When companies give their workers the power to make decisions that improve the customer experience, the worker becomes creative. At the U.K. grocery chain Sainsbury’s, a customer service manager changed the name of a long-standing bakery item per the request of a 3-year-old, and he sent her a gift card, delighting her family.

Share the insights: Supermarkets with loyalty programs have access to data that can elevate the customer experience from good to made-my-day levels. Department leaders who have access to data can align their priorities against high-value, high-potential customers, identify the critical customer encounters that define the brand’s unique value, and change their activities expressly to better serve those customers.

H-E-B’s compensation strategy may be the latest in a major movement to turn workers into experiential capital. However, the trend could waver depending on the economy and competition. I hope not. The sensitivity and spontaneity of human interactions bridge a gap that financial calculations can never fill.

This guest post came courtesy of Bryan Pearson. Bryan is the author of The Loyalty Leap For B2B and is president and CEO of the LoyaltyOne consultancy firm.

This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.